Quality Ladders in the Theory of Growth
NBER Working Paper No. 3099 (Also Reprint No. r1567)
We develop a model of repeated product improvements in a continuum of sectors. Each product follows a stochastic progression up a quality ladder. Progress is not uniform across sectors, so an equilibrium distribution of qualities evolves over time. But the rate of aggregate growth is constant. The growth rate responds to profit incentives in the R&D sector. We explore the welfare properties of our model. Then we relate our approach to an alternative one that views product innovation as a process of generating an ever expanding range of horizontally differentiated products. Finally, we apply the model to issues of resource accumulation and international trade.
Published: The Review of Economic Studies, Vol. 58, No. 193, pp. 43-61, (January 1991)